11 February 2015 Asia Pacific Equity Research Automobile Manufacturers (Automobiles & Components IN (Asia)) NJA Automobile Sector Research Analysts SECTOR REVIEW Jatin Chawla 91 22 6777 3719 [email protected] Different markets, common theme Bin Wang 852 2101 6702 [email protected] Figure 1: New launches and competitive intensity—key factors for stock-picking Jahanzeb Naseer 40% 100% 62 21 2553 7977 [email protected] 30% 75% Akshay Saxena 91 22 6777 3825 [email protected] 20% 50% Mark Mao 852 2101 6710 10% 25% [email protected] Bernard Kie 0% 0% 62 21 2553 7902 Great-Wall Tata Maruti Astra M&M BAIC Brilliance [email protected] % of portfolio from new products in CY16 % of portfolio by profits at high competitve risk (RHS) Source: Company data, Credit Suisse estimates In this report, we make an attempt to analyse NJA stocks on product cycle and competitive intensity with a focus on China, India and Indonesia where these factors are easier to analyse compared to the stocks in Korea and Japan where the companies are more global in nature. ■ Shortening product cycles have increased the importance of launches. With product cycles becoming shorter in most markets, market share gains from new products have accelerated over the past few years. Market shares are an important determinant for stock prices especially under weak market conditions. New launches also help pricing and hence margins in initial years. Within our coverage universe, Tata Motors and Great Wall have the best product cycles, followed by Maruti. ■ Competitive intensity across markets intensive in SUVs. Indonesia is the least-competitive market followed by India and China. Across markets the bulk of launches are centered on SUVs. However, the impact will be much higher in India where the SUV market today has just two to three players with six new players set to enter. China is already a fragmented market, so the impact on profitability from new launches will not be much high. ■ Prefer Tata Motors, Great Wall and Maruti. Tata Motors stands out as the OEM with the highest share of volumes likely to come from new launches and the least threat from competition. The other stock that scores well on this framework is Maruti. Great Wall has high competitive intensity, but a very strong product cycle offsets it. Similarly, Astra's product cycle is not strong but low competitive intensity means that it is more leveraged to a recovery in the Indonesia market, where we are constructive. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 11 February 2015 Focus charts and tables Figure 2: Expect market growth to pick up in both India Figure 3: Key trends in each market where competitive and Indonesia but to decelerate in China launches are focussed 15% Country Key trend Biggest segment is hatchback; a shift towards compact sedans and UVs whose India 10% combined share has risen from 25% to 40% over the past five years Sedan is the biggest segment—the share 5% of low-end sedans has been declining but China that of SUVs and luxury is increasing (five- year CAGR of ~40% vs 20% market 0% growth) PV market growth (%) Has largely been an MPV market; LCGC is gaining prominence with fuel subsidy -5% Indonesia going away and has reached ~14% of the India China Indonesia market in no time 2014 2015E 2016E Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 4: Great Wall and Tata Motors rank the best on new Figure 5: Brilliance, Great Wall, M&M and BAIC have high product launches competitive risks but Astra has the lowest 40% 100% % of portfolio from new products in CY16 80% 30% 60% 20% 40% 20% 10% 0% 0% Low Medium High Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 6: Ranking of each company Company Model pipeline (2H CY14-CY16) Competitive Intensity New untapped segments: upper sedan (Ciaz), compact Of key segments, intensity high only in compact sedans as Maruti Maruti UV, SUV, LCV along with small diesel engine vehicles successfully withstood the onslaught from MNCs in hatchbacks Will enter the fast-growing compact SUV space with two Competitive intensity is very high in the core UV segment as all M&M new launches, also joint products with Ssangyong among major PV players in India entering the segment Strong product cycle with three launches on Jaguar and High intensity in lower premium sedans and lower premium SUVs Tata Motors two on LR in the next one and half years but that is a smaller part of profits as RR twins contribute the bulk Both Toyota and Daihatsu should come up with new Fewer launches in Indonesia as the market is least competitive; Astra MPVs Astra on a strong footing in fast-growing LCGCs By far the strongest product cycle with three new Highest competitive risk on account of a large number of SUV Great Wall launches in both 2014 and 2015 launches expected in China Very weak product cycle with only two series (small High risk from a large number of competitive launches in both Brilliance segment) as all big model launches will be for later three series and X1 space Weak momentum on Hyundai with only new ix25 Competitive intensity high for Hyundai JV from Japanese; for BAIC offsetting all the positive momentum on Mercedes JV Mercedes JV competition in the lower premium sedans (new C class, GLA, GLA, CLA) Source: Company data, Credit Suisse estimates NJA Automobile Sector 2 11 February 2015 New launches – key driver of stocks In this report, we make an attempt to analyse NJA stocks on product cycle and competitive intensity with a focus on China, India and Indonesia where these factors are easier to analyse compared to the stocks in Korea and Japan where the OEMs are more global in nature. With product cycles across markets becoming shorter, market share gains from new Shortening product cycles models have accelerated over the past few years. Our analysis suggests that market have increased the shares have a big impact on stock performance especially in muted market conditions. importance of new launches Also new launches help margins in the initial years as the pricing is stronger. Tata Motors and Great Wall rank the best with ~40% of volumes likely to come from new launches. We divide the various segments in each market into different levels of competitive intensity— high, medium and low. We believe investors should avoid stocks where much of the volumes come from high competitive intensity segments as margins in these segments are likely to shrink in the coming years. Brilliance, Great Wall, M&M and BAIC have >40% of their portfolios by profit exposed to these high risk segments, whereas Maruti, Tata Motors and Astra have >30% of their portfolios from high risk segments. India: SUV landscape to undergo a big shift Despite the recent slowdown in consumer spending, we believe that the India market will pick up in 2H FY16 as the macro environment will start improving. The recent trend of consumers upgrading to compact sedans and UVs should continue, and will be aided by Maruti, with launches in new several new launches lined up in these categories. The compact SUV segment, where segments, is well positioned seven new players will likely join, should witness a significant rise in competitive intensity. Maruti has launches in completely new segments which should help it grow faster than the market. Having withstood the new launch onslaught on hatchbacks over the past few years, Maruti is well placed in terms of competitive intensity. Despite the two new launches after a long gap, only 10% of Mahindra's volumes are likely to come from new products and, with competitive intensity in its core SUV space set to go up sharply, we believe that margin pressure will sustain. Tata Motors is best placed with 40% of volumes likely to come from new launches as it JLR best placed on both attempts to take the Jaguar brand to the next level with four new launches in the next two launches and competitive years. Given the high share of profits from the RR twins where competition is not much of intensity a concern, it is well placed from the competitive intensity angle as well. China: New launches critical in a slowing market After a slowdown in 2014, we expect volume growth to slow further to 5% in 2015-16. Expect market growth to However, SUVs/luxury should gain further share with ~30%/~15% CAGRs in the same period slow further to ~5%; as replacement demand in China is still only at 27% vs 75-90% in mature markets. The SUV however, SUV/luxury to space should see the most launches with 45/30 new launches planned in 2015/2016. grow faster at 30%/15% Great Wall has the best model cycle with ~40% of volumes coming from new launches. BAIC, whose entire profits come from the Hyundai JV, should be negatively impacted by the Japanese brands' continuous price cut pressure, especially given that it does not have any significant new launches in 2015-16.